Apple Takes Aim at Beats Electronics for Streaming & Wearables

The story in the press that Apple is close to acquiring the headphone and online music business Beats Electronics for $3.2 billion has generated a lot of negative and positive buzz.

There is also a lot of commentary about Apple paying too much for the company. However, $3.2 billion is small change for Apple, and Beats Electronics is not that small either.

Martin Scott, Head of Analysys Mason's Consumer Services research practice, has this to say:

Apple are not just buying a headphone business – it’s a streaming business too. Apple’s investment makes sense. We’re talking about a strong higher-end headphone manufacturer – industry estimates tend to put their 2013 sales at USD1.5 billion. Beyond that, however, Apple are also buying a strong brand and an interesting burgeoning online streaming music business. Beats Music is well integrated with AT&T handset plans, and its ‘curatorial’ approach to music recommendation (getting musicians and celebrities to recommend tracks and playlists, not just an engine) should have good synergies with the Apple brand.

Scott also alludes to a second aspect: Apple is likely to do a lot more with headsets, and wearables, possibly around health. In February 2014, Apple was successfully awarded a patent for a health-monitoring earphone system. These earbuds would monitor temperature, heart rate, and perspiration and potentially act as a controller, as well as delivering audio.

Apple's potential purchase of Beats Electronics would help the company increase its footprint in two hot consumer markets centered around the smartphone: streaming music and wearable devices. If Apple could gain a strong foothold in both these markets it would drive more people to the iOS platform and widen the moat on an already powerful ecosystem. The wearable devices market opens up the next frontier in innovation for the mobile and communications market. IoT and LTE will also play a large role in taking the wearable devices market mainstream by providing connectivity that is fast and responsive enough to make use of such devices and apps practical.

Today, with the smart watch buzz, wearable devices for the fitness market, and health apps and devices, we are seeing the beginnings of a new market, akin to that of the early smartphone market. At the moment it appears that the smartphone and the mobile connectivity that goes with it will be the enabling platform and ecosystem to leverage in developing a wearable devices and a truly mobile healthcare market. Here, companies like Apple will need to innovate or attract such products into their ecosystems to stay relevant.

Valuation is in the eye of the beholder. $3.2B may sound a lot but you cannot put a price on "cool". Apples biggest asset is the brand - not the technology. It is buying into a very succesful brand's consumer reach. Beats has a coolness factor to it especially among the younger crowd. Beats came out of nowhere and took share away from stodgy Bose.